Making CO 2 emission trading more effective: Integrating cross-sectoral energy efficiency opportunities

Starting from CO2 emissions data collected during both the production phase and during the lifetime of cars and trucks, we argue that impressive opportunities to reduce emissions can be found in the consumption phase. It is however obvious that energy taxes alone will not lead to a strong reduction of transport emissions. New instruments that stimulate technological innovations should therefore focus on emissions during product use. In our opinion, current designs and proposals for CO2 emission trading systems do not provide incentives to stimulate cross-sectoral energy efficiency investments like the development of cleaner cars and trucks. We think manufacturers should be "rewarded" when their products allow consumers to save energy during consumption. To adapt these flexible designs, we introduced the concept of a "tradable certificate", an allowance for each tonne CO2 avoided as a result of selling a vehicle that is much more energy efficient than other new vehicles. We then developed two dynamic models in which we linked the value of these certificates to the diffusion of the cleanest vehicles. We found that the introduction of the certificate in tradable permit systems can lead to very significant reductions of CO2 emissions. Our models indicate that emissions resulting from the car fleet can be reduced by 25 to 38% over a period of 15 years (starting in 1999). The potential of this new instrument is less spectacular for the truck market as a result of some fundamental differences compared to technological evolutions for car engines. But if the value of the certificate were high enough, emissions resulting from the truck fleet could be reduced by 12% over the same period.